Covid-19: the Impact on Shareholder Activism

COVID-19: THE IMPACT ON SHAREHOLDER ACTIVISM

PRODUCED BY: SHARE: CONTENTS FOREWORD 02 FOREWORD ACTIVIST INSIGHT EDITOR-IN-CHIEF, JOSH BLACK. 04 ACTIVISM UNDER THE SHADOW OF COVID-19 06 FIVE UNCERTAINTIES In little over three weeks, COVID-19 put up formidable obstacles to everyday and Governance for poison pill data), a snapshot is all this is. Subscribers 08 HOW QUICKLY DOES ACTIVISM COME BACK FROM THIS? life. The new coronavirus is by no means only a financial story and our first have access to much more, including regulatory news, campaign-specific 10 POISON PILLS SURGE, REACTION UNCERTAIN concern is for the health and wellbeing of all of our readers and their loved developments, interviews, and analysis. 13 BUSINESS AS USUAL? ones. We hope you are all staying safe. 15 AFTER THE CRISIS, THE DELUGE Our reporting for Activist Insight Monthly, our online magazine, will reflect the 18 A TIME OF WORRY Like everything else, we know shareholder activism has been dramatically more nuanced trends in different regions and sectors (April, appropriately, is 19 PANDEMIC SHORTS affected by this new reality, even if we don’t always know how, or for how dedicated to the energy sector) and we are also tracking a substantial number long. If the novel coronavirus is more than just a financial story, it is the of moves up the Activist Insight Vulnerability index, which uses financial and financial story of 2020. ownership metrics to indicate which companies meet the criteria of previous targets. A demonstration of that is also included in these pages. Consumer spending is drying up, guidance is out the window, and stocks fell sharply before beginning a surprising and unstable recovery. Access to credit We hope you find these insights enlightening and consider becoming a is uncertain and cash is king. Talk of a V-shaped recovery is ever fainter. But subscriber soon if you are not already. For our subscribers or media with proxy season – which thanks to advance notice bylaws began just as the crisis questions, our support and editorial teams stand ready to answer your hit – is the one chance activists get to push for change at some companies. questions. Please email [email protected] for help. Dare activists risk the appearance of agitating at the wrong time? Is change essential for companies that might otherwise go out of business? On behalf of Activist Insight, thank you for your continued interest. Stay safe!

This report is a snapshot of Activist Insight’s attempts to answer those questions. Included are articles our subscribers have had access to for weeks, Senior members of Activist Insight’s editorial team recorded highlighting the chilling effect of COVID-19 on the 2020 proxy season, the a special episode of The Activist Insight Podcast, offering a opportunities it has unleashed for both long and short investors, and the hot take on the implications of the COVID-19 outbreak for hurdles that will have to be surmounted if activists are to remain an influential shareholder activism. Listen now on Apple Podcasts, Spotify, part of corporate life. and YouTube. Please consider subscribing on your platform of choice for forthcoming episodes, including one covering Although we draw on data from three modules on the Activist Insight Terminal JOSH BLACK activism in the energy sector. (Activist Insight Online for campaign data, Shorts for activist short seller data, [email protected]

02 ACTIVIST INSIGHT 5 MODULES, 1 DEFINITIVE TERMINAL FOR ACTIVIST INVESTING AND CORPORATE GOVERNANCE INFORMATION

ACTIVIST INSIGHT ACTIVIST INSIGHT ACTIVIST INSIGHT ONLINE GOVERNANCE VULNERABILITY

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150+ ACTIVIST SHORT SELLER IN-DEPTH FEATURES & INTERVIEWS, PROFILES, LIVE NEWS AND CAMPAIGN OVERVIEWS, NEWS ALERTS, SHARE PRICE TRACKING. AND INVESTMENT SUMMARIES. SHARE ACTIVISM UNDER THE SHADOW OF COVID-19

ACTIVIST TARGETS IN THE OPENING QUARTER BY YEAR

Q1 2014 144 35 20 7 9 4 Q1 2015 172 44 27 20 11 6 Q1 2016 219 67 30 22 17 4 Q1 2017 189 56 18 23 19 4 Q1 2018 224 42 32 33 26 8

Q1 2019 192 48 22 27 27 3 Q1 2020 166 31 15 18 8

U.S. EUROPE CANADA ASIA AUSTRALIA OTHER

The number of companies publicly subjected to activist demands in the opening quarter, by year and company HQ. Source: Activist Insight Online

1-YEAR ROLLING TOTAL OF ACTIVIST CAMPAIGNS

1200 1050 1025 COVID-19 HAS 1100 1000 1000 975 900 ACCELERATED A 950 800 925 SLOWDOWN IN 700 900 600 875 01 JANUARY 2014 01 JANUARY 2016 01 JANUARY 2018 01 JANUARY 2020 01 OCTOBER 2019 01 JANUARY 2020 01 APRIL 2020

ACTIVIST INVESTING. Rolling 365 day total of activist campaigns worldwide. Source: Activist Insight Online

04 SETTLEMENTS AND CONTESTED VOTES IN THE U.S. IN THE OPENING QUARTER BY YEAR Q1 2014 41 1 Q1 2015 49 1 Q1 2016 67 3 Q1 2017 47 6 Q1 2018 55 1 Q1 2019 37 1 Q1 2020 32 3

SETTLEMENTS CONTESTED VOTES

Number of settlements and contested votes for board seats at U.S.-based companies in the opening quarter by year. Source: Activist Insight Online.

BOARD REPRESENTATION TARGETS IN THE M&A AND BREAKUP ACTIVISM TARGETS IN THE U.S. IN THE OPENING QUARTER OF THE YEAR U.S. IN THE OPENING QUARTER OF THE YEAR

Q1 2014 62 Q1 2014 20 Q1 2015 76 Q1 2015 26 VARIOUS MEASURES Q1 2016 100 Q1 2016 31 PEG ACTIVIST Q1 2017 81 Q1 2017 24 Q1 2018 78 Q1 2018 32 INVESTING IN 2020 Q1 2019 60 Q1 2019 33 CLOSER TO 2014 Q1 2020 47 Q1 2020 22 Number of U.S.-based companies publicly subjected to activist demands for board representation in the opening Number of U.S.-based companies publicly subjected to M&A and breakup-related activist demands in the opening quarter by year. quarter by year. LEVELS. Source: Activist Insight Online Source: Activist Insight Online

05 SHARE FIVE UNCERTAINTIES

THE FOLLOWING ARTICLE APPEARED AS ACTIVISM THIS WEEK BY JOSH BLACK ON MARCH 20, 2020.

By now, it’s obvious that the crisis stemming from the spread of COVID-19 could go to zero if the health crisis requires a lockdown period of 18 is going to be with us for some time – likely for the duration of the proxy months, then tweeted that he was buying stocks – “bargains of a lifetime season, at least. What does that mean for activism? if we manage this crisis correctly,” he said. Despite hedging his portfolio, his publicly listed fund was down 6.5% as of Tuesday [five weeks later, the Like the many people adjusting to their new realities, these are no less fund is up 9% for the year]. confusing times for the corporate and financial worlds. Second is the impact of de-risking strategies on issuers and the wider The first source of uncertainty is the stock market. shareholder base.

As of yesterday [March 19], the S&P 500 Index is down nearly 25% year- Returning cash to shareholders or changing managers is likely to look to-date to its lowest level in almost four years. If activists have cash readily less appealing in the current climate, while underwater shareholders may available and the market finds some stability, this might be a buying rue lowball bids from strategic acquirors or private equity sponsors unless opportunity. Certainly, the level of activism had started to drop last year as there is a desperate business need. Preserving value, more than creating it, the market cruised upward, making value investment opportunities hard will likely be the priority for this year. to find. That decline was accelerating in 2020 even before this coronavirus became an economic phenomenon. “I think there’s going to be far less activism than we’ve experienced in past years. I can’t imagine an activist aggressively prosecuting a proxy contest,” However, things may not be so simple in as uncertain an environment MacKenzie Partners’ president, Bob Marese, told me this week. “There are “I CAN’T IMAGINE as this. One activist target in the energy sector has reportedly begun the practical elements of logistics to consider in a time of social distancing, exploring restructuring after the oil price crash caused by Saudi but perhaps more importantly the optics of it. How will the investor base AN ACTIVIST Arabia’s threat to increase production. The same day that Impala view the activity in light of the broader macro conditions?” Asset Management launched a proxy contest at Harley-Davidson, the AGGRESSIVELY motorcycle manufacturer suspended production at its U.S. factories for 11 Third are the logistics of annual meetings. days. PROSECUTING A In a client memo this week, Ele Klein and Aneliya Crawford, two partners As if to illustrate the confusion, Bill Ackman this week gave an emotional in Schulte Roth & Zabel’s shareholder activism group, warned of “logistical PROXY CONTEST.” interview to CNBC in which he warned that certain stocks in his portfolio impediments and shifts in timing and strategy,” including delays in moving

06 Continues... shares from street name accounts. The lawyers also speculated that a significant attention to a proxy contest, Marese told Activist Insight, bare-bones Securities and Exchange Commission (SEC) might have less although institutional stewardship teams should still be engaged. time for fact-checking proxy statements, leading to bareknuckle fight letters. “With so much confusion out there it’s going to be harder to get people to pay attention than is was in past years, so you could end up with “The SEC is making it easier for people to hold virtual meetings, which suppressed voting totals,” Davis added. automatically favors a company and disfavors an activist,” said Chris Davis, head of Kleinberg Kaplan’s M&A and investor activism groups. Finally, companies may have more opportunity – and some justification – to delay and defend. Yet for activists, the urgency might be much greater than that stratagem allows, especially given much of their activity is governed by advance Sarah Wilson, the CEO of U.K.-based proxy voting adviser Manifest, wrote notice bylaws implemented by companies. A nomination letter by on LinkedIn this week: “Spain has taken the sensible step of allowing Starboard Value at eBay this week read almost apologetically, just as CEO meetings to take place up to 10 months later, so long as the annual report Jeff Smith had said two weeks ago: “I don’t want to seem opportunistic is published. This is a great way to handle the disruption. What nobody because the first thing we care about is the health and well-being of needs right now is for the whole world to do a “Japan Week” and have all employees and people around the country, but yes the volatility in the the meetings in the same compressed window.” marketplace is a good opportunity for us.” “THE SEC IS MAKING Morgan Lewis’ Keith Gottfried and Sean Donahue noted this week in a “We are disappointed that Starboard has decided to announce its client memo about poison pills: “Extrapolating what we saw in the wake IT EASIER FOR PEOPLE previously provided nominations amidst the global COVID-19 pandemic of the 2008 financial crisis, we would expect to see a significant uptick while the board and management are trying to focus on the business, in poison pill adoptions as public companies – including those in sectors TO HOLD VIRTUAL employee health and safety, and the important CEO search and portfolio that have been disproportionately impacted by the COVID-19 pandemic – review that are underway,” eBay shot back. continue to grapple with market valuations that they believe do not reflect MEETINGS, WHICH their intrinsic value and, accordingly, make them unduly vulnerable.” Dave “The board by-and-large controls the annual meeting machinery and & Busters Entertainment, which has KKR’s new activist fund on its register, AUTOMATICALLY logistics,” with certain procedural protocols discussed between the activist did exactly that this week after a dramatic fall in value. and board in the two or three weeks leading up to the meeting, says FAVORS A COMPANY Andrew Freedman, a co-head of Olshan Frome Wolosky’s activist practice. Freedman hopes that boards respond to the extraordinary nature of the pandemic in is a spirit of cooperation, not by turning on activists. “My AND DISFAVORS AN Fourth is getting people to pay attention. sincere hope is that companies and their counsel approach the logistics of holding their meetings in a collaborative and cooperative spirit where an ACTIVIST.” Active (not activist) managers may be too preoccupied to devote activist has nominated a slate,” he said.

07 SHARE HOW QUICKLY DOES ACTIVISM COME BACK FROM THIS?

THE FOLLOWING ARTICLE APPEARED AS ACTIVISM THIS WEEK BY JOSH BLACK ON MARCH 27, 2020.

Stock market rallies three days in a row, stimulus on its way. Are activists Those investors that snatched a watchlist of companies they were already looking for fun and feeling groovy? working on when leaving the office are likely to be in the vanguard, according to advisers I spoke to this week. With stock prices still in correction territory (the S&P 500 is down by “PEOPLE ARE almost one-quarter from its peak), thoughts have turned to whether this “Some investors are aggressive, raising money and jumping in,” Ele Klein, represents a buying opportunity for activists. A week after Bill Ackman co-head of Schulte Roth & Zabel’s shareholder activism practice told me. NOT JUMPING said he warned his portfolio companies, “Hell is coming,” he announced “People who don’t do activism for a living seem to have less appetite at that he had put the proceeds of some smartly-timed hedges back into this moment.” ON TARGETS stocks – almost $2.6 billion in fact. “Activist funds are much better equipped today to come through the other THEY WOULDN’T Engaged Capital and Land & Buildings are reportedly fundraising to side” than they were in the last crisis, Rosewater adds. “But they have to take advantage of the current market. Carl Icahn is on maneuvers. Small have enough confidence to commit the capital.” OTHERWISE HAVE wonder that 14 poison pills have been implemented at S&P 500 or Russell 3000 companies year-to-date [March 27], according to Activist Insight Indeed, most of the money deployed so far appears to be going to HAD BUT THEY ARE Governance. Opportunity does not self-isolate. existing, or recent positions where additional capital can be deployed with a high degree of confidence or can tip the scales of a campaign. EVALUATING WHAT “If redemptions don’t become a problem and fundraising works, especially if the indications are that the economy is coming back and stock prices Other factors favor delay, especially for new positions. As well as the THE OPPORTUNITIES don’t react as quickly, that’s tailor-made for an activist,” said David economic uncertainty, companies may still be adjusting to new working Rosewater, Morgan Stanley’s activism defense chief. conditions and future targets could still be in the middle of the pack. ARE.” Waiting a few more days could flush out underperformers and mean

08 Continues... positions below 5% don’t have to be disclosed to the market via 13F filings “A lot of people are finding opportunities to be more open to settlements, until August, rather than in just over 45 days. That would be a better on both sides,” Crawford says. “In particularly vulnerable companies, starting point for a campaign with the potential to develop into a proxy activists are concerned about running a full-blown contest because they fight in 2021. don’t think the companies can survive it.”

“People are not jumping on targets they wouldn’t otherwise have had But that doesn’t mean that the proxy season will be entirely comradely. but they are evaluating what the opportunities are,” says Schulte Roth For one thing, some activists will need to go through with nominations & Zabel Partner Aneliya Crawford. “There’s an expectation that the because of nomination windows and can blame companies for underperformers will be flushed out.” maintaining the deadlines.

Full-blown campaigns appear to be on hold for this proxy season, although “We’re not seeing a lot of companies saying they want to delay their “IN PARTICULARLY Crawford insists that most logistical worries are overblown. annual meeting – some of them because they don’t want to reopen nomination windows,” Klein said. “I think the lack of full thoughtfulness VULNERABLE “I do not imagine we’ll see an acceleration of campaigns,” says Daniel about whether or not to delay at this time has been a little disappointing Kerstein, an investment banker focused on activism defense at Barclays. to me.” COMPANIES, “Timing-wise, the majority of companies’ nomination windows have closed. Starting an activist campaign at this time might be at best a little ACTIVISTS ARE impractical.” CONCERNED ABOUT RUNNING A FULL- BLOWN CONTEST GET THE THOUGHTS OF JOSH BLACK DIRECT TO YOUR INBOX EVERY BECAUSE THEY FRIDAY AS PART OF THE ‘ACTIVISM THIS WEEK’ NEWSLETTER. DON’T THINK THE COMPANIES CAN SIGN UP SURVIVE IT.” SHARE POISON PILLS SURGE, REACTION UNCERTAIN

FIRST PUBLISHED ON APRIL 2, 2020 BY JASON BOOTH ON ACTIVIST INSIGHT ONLINE.

With share prices down and shareholder activists looking for new targets, Today’s flurry of pills is reminiscent of 2008, when dozens of companies American companies are implementing poison pills at a rate not seen in a threw up defensive barriers in response to that year’s financial crisis and decade. Twenty-three pills have been announced in 2020 thus far [April 2], subsequent “Great Recession.” But the new batch of pills have some key including 17 in March alone, according to Activist Insight Governance data. differences from earlier versions. Most notably, the average lifespan of this By comparison, 18 pills were introduced in all of 2019. year’s pills is a little over one year, and in some cases can be terminated even earlier, while many 2008 pills had a 10-year lifespan. What has struck market observers is that many of this year’s pills appear to be “preemptive,” with no immediate threat of a hostile takeover or Significant volatility indications that an activist shareholder is circling the business. And none of the recent rights plans are subject to a shareholder vote. The rush to put up Consumer cyclical companies are the most numerous adopters of pills this defenses may give activists additional ammunition for proxy fights in 2021. year, accounting for around a quarter of the new rights plans, with energy companies and air travel firms also among those adopting the defensive Coronavirus pills measure. The majority had market capitalizations of under a billion dollars, though two large-caps and two mid-cap stocks also issued pills, according “These are like anti-Coronavirus pills,” said Professor Marcel Kahan at New to Activist Insight Governance data. “THE AVERAGE York University School of Law – justified, at least in the minds of some executives, by stock market volatility and the difficulty of reacting to an Six Flags announced a rights plan on March 31, citing the COVID-19 LIFESPAN OF THIS emerging threat due to COVID-19 disruption. pandemic and “significant volume and volatility” in the trading of its stock. A day earlier Spirit Airlines launched a pill “to reduce the likelihood” that a YEAR’S PILLS IS A Poison pills – formally known as shareholder rights plans – were developed potential acquirer could gain control via open market accumulation, while in the 1980s to fend off hostile takeovers. “Triggered” when an investor aerospace parts company AAR Corp said it needed a pill to give its board LITTLE OVER ONE goes over a certain ownership level, the plan automatically issues new time “to make informed judgments and decisions.” None pointed to real, or shares to other stockholders, thus diluting the buyer’s stake. even perceived takeover threats. YEAR.”

10 Continues... Some pills, however, have been the result of a clear and present threat, Most new pills also last for one year or less and run out before the 2021 especially in the energy sector where habitual acquirers like Carl Icahn have proxy season, when issuers may hope the disruption caused by COVID-19 been active. Both Occidental Petroleum and oil refining and distribution is over and shareholders and proxy advisers alike will take a holistic view of company Delek U.S. Holdings put in pills in reaction to Icahn buying shares. governance and performance. Possibly afraid of being the next target, energy infrastructure company William’s quickly followed suit. Several of the companies with new pills are currently vulnerable on both fronts, however. Entertainment destination company Drive Shack and Some pills do predict activist activity; none quicker than The Chefs’ aerospace company AAR Corp each have staggered boards and rank as Warehouse, which adopted a pill on March 22, a week before activist highly vulnerable on Activist Insight Vulnerability. investor Legion Partners disclosed a new 5.5% stake in the food distributor.

Activist influence POISON PILLS ADOPTED BY YEAR

Shareholder activists deserve much of the credit for shortening the 40 durations of poison pills, according to Morton Pierce, a partner at law firm FULL YEAR White & Case. “The activists came along (after 2008) and were taking aim at the pills, and that resonated with the shareholders base as being anti AT APRIL shareholder democracy.” 21

Fear of activism is apparent from current practices, although Pierce cautioned that, “The pill has never been a block to a proxy contest.”

20 Almost half the current pills have 10% trigger points, while in 2008, 18 around two-thirds of those tracked by Activist Insight Governance had 15 15% thresholds (Activist Insight Governance does not guarantee the 14 13 comprehensiveness of 2008 data). Since the Great Recession, some 11 companies have also distinguished between activists, which file Schedule 8 “THE PILL HAS NEVER 13Ds, and passive investors on 13Gs, giving the latter higher thresholds. 7 Stripping out 5% pills designed to protect net operating losses, the 5 4 3 3 BEEN A BLOCK TO A average trigger this year is around 14%, according to Activist Insight Governance data. 2014 2015 2016 2017 2018 2019 2020 Number of Russell 3000 companies adopting poison pills by year and by April 21 of each year. PROXY CONTEST.” Source: Activist Insight Governance.

11 The reaction 2020 POISON PILLS BY MARKET CAP

Activist campaigns in the 2021 proxy season will likely center on how NANO CAP LARGE CAP management teams reacted to the current crisis and whether they are 2 COMPANIES 3 COMPANIES perceived to have done a good job. MID CAP 3 COMPANIES MICRO CAP They may also hope to rally the governance community to come down 11 COMPANIES harshly on companies that implemented pills.

Over the last decade, proxy advisory firms like Institutional Shareholder Services (ISS) and Glass Lewis have come out strongly against both “BOARDS poison pills and the board members who implemented them, typically SMALL CAP recommending investors vote against an incumbent board that authorizes 21 COMPANIES CONTEMPLATING a long-term poison pill without subjecting it to shareholder approval. Number of Russell 3000 companies adopting poison pills as of April 21, 2020 by market cap. Large cap: >$10B, Mid cap: $2B - $10B, Small cap: $250M - $2B, Micro cap: $50M - $250M, Nano cap: <$50M. Source: Activist Insight Governance DEFENSIVE Limiting pills to one year or less, however, makes them far more tolerable. ISS, for example, states in its 2019 proxy guidelines that it may be more 2020 POISON PILLS BY SECTOR MANEUVERS MAY lenient if that pill has a term of one year or less, and the board can offer a rationale for adopting it. Whether COVID-19 is sufficient rationale is BASIC MATERIALS CONSUMER DEFENSIVE WANT TO CONSIDER currently unclear. Both ISS and Glass Lewis declined to comment for this 2 COMPANIES 1 COMPANY story, though ISS indicated it may provide clarity in coming days. REAL ESTATE CONSUMER THAT AN EFFECTIVE 3 COMPANIES CYCLICAL Some advisers warn that implementing a pill should not distract directors HEALTHCARE 11 COMPANIES RESPONSE TO or make them complacent, citing a March 19 note from ISS to its clients 3 COMPANIES that “boards contemplating defensive maneuvers may want to consider THE PANDEMIC that an effective response to the pandemic could be more advantageous than any pill.” TECHNOLOGY COULD BE MORE 5 COMPANIES INDUSTRIALS ADVANTAGEOUS ENERGY 9 COMPANIES 6 COMPANIES THAN ANY PILL.” Number of Russell 3000 companies adopting poison pills as of April 21, 2020 by sector. Source: Activist Insight Governance

12 SHARE BUSINESS AS USUAL?

FIRST PUBLISHED ON APRIL 07, 2020 BY JOHN REETUN ON ACTIVIST INSIGHT ONLINE.

The fallout from the coronavirus pandemic has caused logistical and ethical these demands yet to announce their annual meeting dates. Starboard Value issues for shareholder activists in the U.S., but will this lead to fewer proxy has proxy contests in play at eBay and GCP Applied Technologies, while contests or simply defer campaigns until next season? Commvault Systems’ nomination deadline beckons.

Attack or backtrack? Many of these could settle, and 87% of Activist Insight newsletter readers who responded to last week’s poll believe that companies and activists would Sidley Austin, which mainly represents companies, suggested in early March rather settle than draw out a campaign in these uncertain times. However, that the current market instability may prove to be “corporate America’s some proxy contests seem likely to go the distance, including those at USA most effective poison pill,” as activists wanting to launch proxy contests are Technologies [the campaign ended a few days before the annual meeting left with a choice between a long-term investment that could cost a fund with a capitulation by the company], First United, and Tegna. millions, or risk being seen as a short-term investor that “stands to lose credibility” if a proxy fight is followed by a hasty exit. Image issue “SOME PROXY Moreover, companies have been forced into a survivalist state of mind by the Defense law firm Wachtell, Lipton, Rosen & Katz recently argued that CONTESTS SEEM crisis, ditching years of dismantling takeover defenses. So far this year, 25 activists who launch campaigns during the current market volatility will companies adopted poison pills [April 7], the highest number since at least be marked as “mere profiteers… opportunistically taking advantage of the LIKELY TO GO 2013, according to Activist Insight Governance. Meanwhile, some activists COVID-19 pandemic to further line their pockets.” have withdrawn proxy contests in a year that had started out more subdued THE DISTANCE, than previous years. The argument has been echoed by some companies, which have claimed activists running proxy contests amid such market uncertainty are acting INCLUDING THOSE AT Xerox pulled its proxy contest and takeover effort at HP, while Jonathan insensitively. When Starboard Value launched its proxy contest at eBay in Litt’s Land & Buildings withdrew its slate at American Homes 4 Rent, citing late March, the company lambasted the fund’s timing and suggested the USA TECHNOLOGIES, concerns over the disruptive effect of the coronavirus. contest was an “unnecessary distraction” as eBay remains concerned with its “business, employee health and safety, and the important CEO search.” FIRST UNITED, AND Other contests settled but many more are still ongoing. According to data compiled by Activist Insight Online, there are 43 unresolved demands for Patrick Tucker, managing director at communications agency Abernathy TEGNA.” board representation in the U.S. [April 7], with most of the companies facing MacGregor, told Activist Insight Online that funds will not be dissuaded

13 Continues... from launching a campaign in fear of their “raider” legacy. “Activists have issues that arise from mass lockdowns. With campaigns not only relying proven to be very savvy in managing their public profile,” Tucker noted, on meeting dates being honored, there is also the need for regulators to adding that “companies cannot simply assume image concerns will slow an remain vigilant and election inspectors active. attack.” Aneliya Crawford, a partner at Schulte Roth & Zabel, has said that while Indeed, Tucker suggested that the onus will be on companies “to be ready there are some “logistical challenges,” she believes they have little effect on to prove why a proxy contest in this environment is not just unseemly but dedicated activists launching campaigns. deeply damaging.” “The volume continues to be high, people are not just abandoning Paperwork contests,” Crawford told Activist Insight Online. “Different methods of communication may come forward. Contests could just as effectively go Public image is only one facet that activists would have to consider under the distance.” the current circumstances of the markets. The other is the logistical

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BE HIGH, PEOPLE REGISTER FOR A FREE TRIAL ARE NOT JUST ABANDONING CONTESTS.” SHARE AFTER THE CRISIS, THE DELUGE

THE FOLLOWING ARTICLE APPEARED AS ACTIVISM THIS WEEK BY JOSH BLACK ON APRIL 24, 2020.

One of the questions we’ve been asked most frequently over the last crunch that put pressure on many activist hedge funds by sending limited couple of months is what happened to activism during and after the Global partners rushing to redeem capital and led to a lull in new investments. Financial Crisis in 2008 and 2009. The other take is that, while 2008 was quiet, activism came back strongly in the immediate aftermath of the crisis as a stabilizing market left many Discussions with market players who went through that event point to companies exposed, both in terms of performance and governance. two major changes. One is that the 2008 crisis was a banking-led liquidity

1-YEAR ROLLING TOTAL OF INITIAL SC 13D FILINGS

4000 80%

INITIAL SC13D FILINGS

3000 60% “WHILE 2008 WAS QUIET, ACTIVISM 2000 40%

CAME BACK 1000 20% 1-YEAR 500 S&P CHANGE

STRONGLY IN 0 2006 2008 2010 2012 2014 2016 2018 2020 THE IMMEDIATE OF FILED INITIAL SC 13DTOTAL ROLLINGFILINGS 1-YEAR -20% AFTERMATH OF THE

-40% CRISIS.” Rolling 365 day total number of initial SC 13D filings filed, versus 365 day change in the S&P 500 index. Source: Activist Insight Online

15 -60% To an extent, both are true. Activist Insight calculates that the number of has grown significantly in recent years – a trend that might not show up in initial 13D filings, which disclose a new stake of over 5% for an investor with the 13D filings because 5% stakes have become less important as activists intent to influence the company, remained stable in 2007 and then fell quite have targeted larger companies or wielded influence with smaller positions. quickly. A better measure might be definitive contested proxy statements (form But 13D filings contain a lot of “noise” – all shareholders owning more than DEFC14A) filed with the Securities and Exchange Commission (SEC). DEFC 20% of a stock file them, some activists file them even on passive trades, forms are filed on behalf of the management and dissident slates in proxy and influence is a broad term that encompasses everything from control to contests for board seats, and occasionally by activists in withhold campaigns a board seat or a financing agreement. Perhaps most persuasively, initial 13D and contested M&A solicitations. That leaves out some kinds of campaign filings have continued to fall dramatically so that 2019 represented only 40% and plenty of situations that settled, not to mention activist campaigns of 2007’s total. Activist Insight Online demands data suggest that activism abroad. But it does provide a reference point we might call contested

1-YEAR ROLLING TOTAL OF DEFC14A FILINGS

160 80%

DEFC14A FILINGS

120 60%

80 40% S&P 500 1-YEAR 500 CHANGE S&P “2019 ALSO SAW A 40 20%

SPIKE IN CONTESTED ROLLING1-YEAR TOTAL OF FILED DEFC14A FILINGS 0 0 2006 2008 2010 2012 2014 2016 2018 2020 SOLICITATIONS AFTER -20% THE VOLATILITY AT THE

-40% END OF 2018.” Rolling 365 day total number of DEFC14A filings filed, versus 365 day change in the S&P 500 index. Source: Activist Insight Online

16 -60% situations with a couple of big asterisks. Several activist lawyers confirmed Third, 2020 is off to a fairly slow start, although this is partly due to a very that DEFCs should be a useful proxy for contested situations (pardon the busy second half of 2019 for DEFC filings. Of the 14 years from 2007 to pun). 2020, just two first-quarter periods saw fewer DEFCs filed than in 2020. Though 2019 rebounded quickly and ended up a busy year for contested These data suggest a few conclusions. First, DEFC filings spiked in the first situations, that doesn’t look as likely this year. half of 2009 beyond anything we’ve seen since – so, a post-crisis spike in contested situations does bear out. Second, 2019 also saw a spike in This may just be a short-lived trend, however, as the market and activists contested solicitations after the volatility at the end of 2018 but only after alike adjust to the new normal. Many advisers expect activism to come a slow start to the year (slower in the first quarter, in fact, than in the first roaring back once the uncertainty is over. That may be the case, but if 2021 three months of 2020). is a repeat of 2009, there could be leaner years to follow.

LISTEN TO A SPECIAL EPISODE OF THE ACTIVIST INSIGHT PODCAST ON THE IMPACTS OF COVID-19 ON SHAREHOLDER ACTIVISM.

LISTEN NOW “MANY ADVISERS EXPECT ACTIVISM TO COME ROARING BACK ONCE THE UNCERTAINTY IS OVER.”

13 SHARE A TIME OF WORRY

DATA COLLECTED FROM ACTIVIST INSIGHT VULNERABILITY

SELECT COMPANIES WITH SIGNIFICANTLY INCREASED VULNERABILITY*

COMPANY TICKER VULNERABILITY** RED FLAGS STERLING BANCORP STL HIGH PERFORMANCE PROFITABILITY DIRECTOR TENURE WHIPSAWING STOCK MARKETS LED NMI HOLDINGS NMIH HIGH PERFORMANCE OWNERSHIP EXECUTIVE CHAIRMAN TO MAJOR CHANGES IN ACTIVIST EVERI HOLDINGS EVRI HIGH PERFORMANCE VALUATION BALANCE SHEET INSIGHT’S RANKINGS OF U.S. HUDSON PACIFIC PROPERTIES HPP HIGH OWNERSHIP DIRECTOR SUPPORT ACTIVIST OWNERSHIP COMPANIES LIKELY TO APPEAR ON INVITAE NVTA HIGH PERFORMANCE VALUATION PROFITABILITY

THE SCREENS OF ACTIVIST INVESTORS. **The highly vulnerable classification category is comprised of the highest scoring 33.3% companies profiled on Activist Insight Vulnerability,

FINANCIAL SERVICES AND INDUSTRIALS SECTORS WERE AMONG THOSE THAT SAW A GREATER SHARE NUMBER OF COMPANIES WITH SIGNIFICANTLY INCREASED VULNERABILITY* OF SIGNIFICANTLY VULNERABLE COMPANIES, WHILE THE HEALTHCARE LOW VULNERABILITY MODERATE VULNERABILITY HIGH VULNERABILITY SECTOR EXPERIENCED THE OPPOSITE EFFECT. 135 COMPANIES

WHILE EACH VULNERABILITY CLASSIFICATION CATEGORY CONTAINS AN EQUAL SPLIT OF 149 COMPANIES COMPANIES, THEIR COMPOSITION HAS UNDERGONE SOME NOTABLE CHANGES, WITH SOME COMPANIES EVEN GOING FROM LOW TO HIGH 37 COMPANIES VULNERABILITY IN JUST TWO MONTHS. *Refers to the 455 companies with a minimum of a five point increase in vulnerability between February 18, 2020, and April 22, 2020. 18 SHARE PANDEMIC SHORTS

FIRST PUBLISHED ON MARCH 27, 2020 BY IURI STRUTA ON ACTIVIST INSIGHT SHORTS.

The COVID-19 pandemic has presented an opportunity for some companies to engage in pump-and-dump schemes and for short sellers to call them out.

Activist Insight Shorts has counted six campaigns launched at drug companies claiming to have developed either tests for coronavirus or vaccines for COVID-19. Adam Gefvert’s White Diamond Research has been the most enthusiastic with three to date.

“The sector is being overloaded right now, too many companies are ACTIVIST SHORT CAMPAIGNS BY YEAR involved in testing and making vaccines,” Gefvert told Activist Insight Shorts. “Only the biggest companies with the best testing devices will 279 FULL 265 YEAR take 99% of the market share.” AT APRIL White Diamond’s shorts in Dyadic and NanoViricides, two companies 21 touting vaccines for COVID-19, have delivered high returns since the 190 191 campaigns were launched in March and February, respectively. 168 159 “ONLY THE BIGGEST However, Co-Diagnostics, a company boasting to have developed a test for the novel coronavirus, is proving a tougher nut to crack, with a COMPANIES WITH THE campaign return of negative 183%. 78 72 66 Inovio Pharmaceuticals advanced as much as 330% when the company BEST TESTING DEVICES 49 51 53 claimed it designed a COVID-19 vaccine but shed some gains after 36 WILL TAKE 99% OF THE Andrew Left’s Citron Research called it a stock promotion scheme. 2014 2015 2016 2017 2018 2019 2020 MARKET SHARE.” Number of activist short campaigns launched by year, and by April 21 of each year. Source: Activist Insight Shorts.

19 Continues... All in the same boat Hindenburg has already launched five short campaigns this year, the most of any activist, followed by Spruce Point Capital Management and While the first market correction induced by the COVID-19 pandemic White Diamond with four each. was welcomed by activist short sellers, it does not change the industry’s outlook. A long bull market has made the environment difficult for short With short sellers often arguing the market is disconnected from sellers that make fundamental calls. fundamentals, many have increasingly focused on accounting frauds, which are less correlated with benchmarks. According to Activist Insight “The macro environment has been lifting or sinking most boats — every Shorts data, 15 short campaigns this year [March 27] primarily alleged day we wake up to news like entire countries being shut down or trillion accounting irregularities, the highest level since counting started in 2013. dollar easing and stimulus programs,” Nathan Anderson of Hindenburg Research told Activist Insight Shorts. “Targeting companies that we believe are egregious frauds is still highly effective - and helps clean up the market in the process,” Anderson said.

AVERAGE ONE-WEEK CAMPAIGN RETURN “TARGETING AT FULL APRIL YEAR COMPANIES THAT 21 WE BELIEVE ARE 7.9% 7.5% 7.4% 7.6% 6.7% EGREGIOUS FRAUDS 6.5% 6.4% 5.7% IS STILL HIGHLY 4.1% 4.0% 3.6% EFFECTIVE - AND 3.2% HELPS CLEAN UP 2.3% THE MARKET IN THE 2014 2015 2016 2017 2018 2019 2020 PROCESS.” Average one-week activist short campaign return by year, and by April 21 of each year. Source: Activist Insight Shorts.